Crypto Regulation: Where We’ve Been And Where We’re Going

Many investors see increasing regulation as a key driver of the crypto bear market of 2018 and blame the ICO (initial coin offering) market’s cool-down on the potential threat. In October 2018, ICO issuers collected $770 million, but that sum was only about half of what they raised in December 2017, according to CoinDesk. The slowdown was likely influenced by SEC Chairman Jay Clayton’s continued pronouncements that most ICOs are securities, implying that any that hadn’t registered with the SEC could face legal trouble.

In the spring, crypto regulation had brief moments of bullish sentiment emanating from Washington. William Hinman, director of the SEC’s division of corporation finance, declared that ether and bitcoin aren’t currently securities, citing their decentralized nature as a key reason. Since ether held an ICO in 2014, but it became more decentralized over time as many people began mining the currency and validating transactions, analysts concluded that digital assets can morph from being a security to not being one. Another moment of hope for crypto bulls came after the SEC rejected the Winklevoss twins’ proposal for a bitcoin ETF. After the decision, SEC Commissioner Hester Peirce issued a dissenting statement, saying she believes the proposal should have been approved.

Starting this fall, U.S. regulators started making waves again, stirring up fear among investors. At a tech conference in Dubai, CFTC Commissioner Brian Quintenz said cryptocurrency application developers could be held accountable if their apps are used for illegal purposes, even if they’re not running a business and if their code is open-source or publically available. So if an engineer builds a gambling platform that later facilitates betting in states where that’s illegal, he or she could be held personally accountable. This statement caused concern among developers because it went against a widely held view that, if you build open-source software and you’re not running a business, you’re not liable.

In November, the SEC announced it had charged EtherDelta, a decentralized crypto exchange that has no single corporate owner, with operating an unregistered trading platform. Robert Cohen, the head of the SEC’s cyber unit, told Forbes, “The focus is not on the label you put on something or the technology you’re using. The focus is on the function, and what the platform is doing. Whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.” The action prompted other decentralized exchanges like 0x to release statements saying they aim to abide by the law in their operations.

A week later, the SEC announced it had charged two crypto projects, AirFox and Paragon, with selling unregistered securities. Before these cases, the SEC had only closed one other non-fraud ICO case—it involved a restaurant-review app whose company had told investors they could expect their tokens to increase in value.

Read more of this Forbes article by Jeff Kauflin by clicking here.